IS FDI GOOD FOR THE INDIAN ECONOMY?
India has liberalized its policy regime significantly since 1991. This liberalization has been accompanied by the growth of FDI in developing countries. Foreign direct investment in India has grown fairly after the implementation of the various government initiatives.
What is FDI?
FDI, in general, is a source of non-debt financial resource for economic development. Foreign investments are made in India as they are means of achieving technical know-how, resources, generating employment, etc. between advanced and developing countries.
“An investment in knowledge pays the best interest” – Benjamin Franklin
“FDI is a responsibility for Indians & an opportunity for the World. My definition of FDI for the people of India is ‘First Develop India” – Narendra Modi
STATISTICS – What Numbers have to Say?
- Foreign Direct Investment (FDI) has displayed an increase in absolute numbers from $45.15 billion in FY15 to $60.97 in FY18 but the rate of growth in FDI inflows is falling consecutively since the last two years.
- A growth rate of just 1.24 per cent was recorded in FY18.
- Despite Prime Minister Narendra Modi’s ‘Make in India’ campaign in September 2014 to drive foreign investment in the country and improvement in Ease of Doing Business the country’s Foreign Direct Investment (FDI) growth rate has declined in the past couple of years. The growth rate of FDI in the country has slowed down since the financial year 2016 when it saw a robust growth of 23.05 per cent.
- The slowdown in FDI growth rate and India’s performance in the World Bank’s Ease of Doing Business index portray two different pictures. India jumped 23 places to secure the 77th spot in Ease of Doing Business index in FY18.
- We get 38% of FDI from Mauritius and apart from it the leading sources of FDI for India are Singapore, United Kingdom, and Japan
- Highest FDI was recorded in the services of computer software and hardware, telecommunications, construction, automobile, and hospitality sectors.
- Few sectors are not permitted for FDI like atomic energy, railway, stock markets, real estate, and mining of coal and metals.
- According to UNCTAD’s world investment report, India is the second lucrative place for FDI after China.
DESCRIPTION – Let’s take a Deep Dive
Foreign Direct Investment (FDI) is a process where one or more companies/people from particular nation put their capital into other nation according to their development needs. The International Monetary Funds’ Balance of Payments Manual defines FDI as ‘an investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor, the investor’s purpose being to have an effective voice in the management of the enterprise’.
The investor will acquire assets of the business or establishes business operations to get a controlling interest in the business in a foreign country. This distinctly separates than buying the equity of foreign companies, i.e. portfolio investment.
There are mainly three types of FDI
- A horizontal investment is opening up the same business in a foreign country.
- A vertical investment is when a slightly differentiated business is established in a foreign country.
- And a conglomerate is when the investment is made even if the business is unrelated to its existing business.
FDI in India doesn’t have a uniform rate. Some industries allow 100% FDI i.e. the entire funds of the business can be from foreign direct investment. The percentages vary from 26% to 49% to 51%.
Advantages of FDI
- FDI benefits the global economy, as well as investors and recipients.
- Due to FDI, there is an improvement in technical know-how and the development of required skills which will reduce the cost and thereby increase the working efficiency.
- FDI increases job opportunities in many sectors and uplifts the lifestyle.
- FDI promotes investment in key areas such as infrastructure development; as a result, there will be more production of capital goods.
- With the help of FDI, the exports of many underdeveloped countries have increased. The creation of special economic zones and the promotion of 100% export oriented units have helped FDI’s in increasing the exports from other countries.
- FDI strengthens financial services of a country by not only entering its banking industry but also by extending other activities such as merchant banking, portfolio investment, etc.
- The exchange rate is stabilized due to the constant and continuous supply of foreign exchange.
- FDI’s are responsible for the development of backward areas.
- Healthy competition increases and brings profit to the customers.
Disadvantages of FDI
- The presence of FDI has contributed to the rise in inflation in the economy.
- FDI’s are one of the reasons for exchange crises at times.
- FDI’s has made domestic culture make disappear and made local people adopt the different culture alien to the country.
- In order to capture local markets the FDI’s have gone to the extent of corrupting the officials.
- No real benefit to farmers.
- Indian market gets flooded by Chinese and American goods.
- Our foreign dependency will be increased so it will affect our overall development.
- Small companies and merchants will suffer from FDI in the retail sector.
FDI provides India with stability in inflows of funds, access to international markets, export growth, technological transfer, and skills to improve the balance of payment. But FDI doesn’t guarantee a high growth rate. Host countries should enforce environmental regulations. FDI must be monitored and nurtured in such a way that it will bring more skills and resources.
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For the first time, FDI in India was more than China in the year 2018. Thanks to M&A like Walmart + Flipkart and Hindustan Unilever + Schneider Electric
Author – Riddhi Pansare